Comments on: Monetary Policy and the Housing Crisis https://organizationsandmarkets.com/2008/10/08/monetary-policy-and-the-housing-crisis/
Economics of organizations, strategy, entrepreneurship, innovation, and moreTue, 21 Oct 2008 16:53:07 +0000
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By: Dick Langlois https://organizationsandmarkets.com/2008/10/08/monetary-policy-and-the-housing-crisis/#comment-71772
Tue, 21 Oct 2008 16:53:07 +0000http://organizationsandmarkets.com/2008/10/08/monetary-policy-and-the-housing-crisis/#comment-71772More seriously, here is a new IMF working paper whose results are very much in the vein of what we have been discussion in this post. This financial crisis, the authors say, shares “characteristics often associated with aggregate boombust credit cycles, such as financial innovation (in the form of securitization), changes in market structure, fast rising house prices, and ample aggregate liquidity. We find evidence that all these factors were associated with the decline in lending standards. Denial rates declined more in areas with a larger number of competitors and were further affected by the entry into local markets of large financial institutions. The increasing recourse to loan sales and asset securitization appears to have affected lender behavior, with lending standards deteriorating more in areas where lenders sold a larger proportion of originated loans. Lending standards also declined more in areas with more pronounced housing booms. Finally, easy monetary conditions also played an amplifying role. These effects were more pronounced in the subprime mortgage market than in the prime mortgage market, where loan
denial decisions were more closely related to economic fundamentals.”
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By: rlanglois https://organizationsandmarkets.com/2008/10/08/monetary-policy-and-the-housing-crisis/#comment-71751
Thu, 16 Oct 2008 21:10:07 +0000http://organizationsandmarkets.com/2008/10/08/monetary-policy-and-the-housing-crisis/#comment-71751Here is a CNN Press conference from right after the bailout that sheds some light on these issues:
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By: Steve Phelan https://organizationsandmarkets.com/2008/10/08/monetary-policy-and-the-housing-crisis/#comment-71707
Thu, 09 Oct 2008 19:59:46 +0000http://organizationsandmarkets.com/2008/10/08/monetary-policy-and-the-housing-crisis/#comment-71707There seems to be a consensus that lending standards were lowered. The question is then why?

Liebowitz argues that it was because of political pressure to loosen standards around CRA and minority lending (although he admits that speculators were the ones taking ARMs with high default rates).

Taylor argues that the low foreclosure data in a rising market masked the real risk.

I would argue it was because of agency problems throughout the mortgage distribution chain.

Liar loans are the classic example (where was see at least one case of a $14,000 a year worker getting a $700.000 mortgage). Who had an incentive to

Not the buyer, who wanted a bigger house
Not the broker, who received a commission for originating loans
Not the bank, who onsold the mortgage to investment banks
Not the investment banker, who packaged the mortgage as a security and onsold to mutual funds and pension funds
Not ratings agencies, who are paid by investment banks
Not fund managers, who are paid a % of funds under management and could earn higher returns on AAA rated bonds.

I contend it was the incentive structure that super-charged the housing boom by encouraging relaxed lending standards that made more money for everyone in the system – the proverbial ‘free lunch’ that turned out not to be free.

With Information Technology (IT) taking an advanced role in defining and supporting our organizations and markets, how will the necessary changes in our organizations come about? Can we continue to rely on “spontaneous order” to see us through rebuilding our organizations.

I believe this financial crisis is the equivalent to what the Soviet Union experienced in the past 2 decades. Our organizations, the bureaucracies, are too slow and inefficiently efficient to deal with the demands of them in this fast paced world.

This leaves us with few alternatives. Either we keep the old organizations and accept a lower standard of living, regress to manual systems, or enable IT to take the lead role in remaking our more prosperous future.

We must define what the future organizations are. It is the people who write this blog that have, I think, the responsibility to make these points known and ensure the appropriate actions are taken. Your work in transaction costs, defining the boundaries of the firm, and defining a greater division of labor are the tools that society needs to see us through this mess.

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By: Michael F. Martin https://organizationsandmarkets.com/2008/10/08/monetary-policy-and-the-housing-crisis/#comment-71693
Wed, 08 Oct 2008 19:04:11 +0000http://organizationsandmarkets.com/2008/10/08/monetary-policy-and-the-housing-crisis/#comment-71693Hayek and Schumpeter will be as influential in the 21st century as Keynes was in the 20th. Hayek’s intertemporal coordination theory prognosticated the present credit crisis.
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